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Assignment - Internal and External Source of Finance Papers
Write a story with the following components:
1. Name of the company: must be invented (not a real case company).
2. Activity of the said company (types of products, services).
3. Legal status and size of the company (number of staff, factories, retail outlets (if it applies).
4. Purpose or use of the funds (specify if it is a short, medium or long term finance).
5. Specify the required amount of the fund.
6. Explain how the internal source of finance and the external source of finance (from the random draw), are both fitting to your context.
Answer - Name of the company: Australia USA Energy system Limited
Brief Introduction about the company:
Australia USA Energy System Limited is a publicly traded company which is listed on Australia Stock Exchange and New York Stock Exchange. The company provides the energy to residential and commercial consumers in Australia and USA. The company operates in four segments: investment segment, wholesale market, group operations and customer markets. The company generates power from various resources such as hydro, wind, solar, thermal etc. and the company is having approx. 17000 MW portfolio of electricity generation. The company was founded in 1925 and is headquartered at Queensland Australia. The company is one of the largest energy providers in USA and Australia. The company has employed 4500 employees approximately across the Australia and USA and is considered as one of the best and preferable employers in the world.
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Existing sources of finance and required sources of finance:
The company has financed from external as well as internal sources. The major external sources of finance are USD Senior notes, Subordinated notes, Medium term notes, bank loans, CPI bonds, other loans and Bank guarantee etc. The major internal sources of finance of finance are internal accruals i.e. surplus of profit and loss, issued capital, employee equity benefits reserve, hedge reserve etc.
The company existing total borrowings are $4,200 million and total equity is $8,000 million approximately. The company has majorly financed its assets from equity. The company is well established in the USA and Australia Market and is considering for further expansion. The company require both short-term and long-term sources of finance. Short-term sources are required for working capital management and long-term sources are required for capital investment. The demand for electricity from renewable sources and from the sustainable prospective is increasing and company is considering expanding its renewable business. The company is required $1500 million approximately for capital investment and $200 million for working capital management.
The company can manage the funds requirement from internal as well external sources. The working capital requirement of $200 million can be managed from short term bank loans such as CC limit, bank overdrafts for short-term requirements.
There are various resources available for long-term financing and the company can arrange the long-term financing easily because the company is well established in the market and the has maintained the good credit rating in world. The company should finance 30% of funding requirement from external sources and 70% from internal sources because the company have financed its existing asset from internal sources. The 30:70 ratio is ideal because it will maintain its existing financing ratio and the company can manage most of the funds internally and the company is having good profitability over past years and accumulated huge surplus in profit and loss account. The company should follow the below capital structure to finance the long-term investment:
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Particulars
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Amount
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Funding requirement
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$1,500 million
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Sources of finance:
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Internal sources (70%)
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Ordinary shares
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$700 million
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Surplus of statement of profit and loss
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$350 million
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External sources (30%)
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Bank loan
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$200 million
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USD Senior notes
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$250 million
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Total
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$1,500 million
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The detailed sources of funding can be understood from the below graph:
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